adminSLUMPING prices for oil and other commodities and the prospect of rising global interest rates threaten to return some of the biggest emerging market (EM) nations to “junk” credit ratings, laying bare many countries’ failure to reform in the good times.Emerging economies have earned roughly 200 rating upgrades since 2007, nearly half of them to the top “investment grade” category but this year Standard and Poor’s has made around a third more EM downgrades than upgrades.
Those left three of the biggest names in the EM universe — Russia, Brazil and South Africa — just one cut away from “junk”, after a decade of rising ratings that helped drive the roughly $8 trillion investment that has poured into EM stocks and bonds.
“At the moment you have a number of triple-B credits on the brink (of junk),” Bank of America-Merrill Lynch head of fixed income and economics for EEMEA, David Hauner, said.
“The implications are bigger than of a normal downgrade. It will be interesting to see if crossover investors (who usually buy developed markets assets) will be willing to stay invested.”
BNP Paribas estimates that if oil stays around $80 a barrel for the next few years, producers in the Gulf, Russia, Latin American and Africa could see their ratings cut by between half a notch and two notches – far more if it sinks to $60.
Standard and Poor’s EMEA head of sovereign ratings, Moritz Kraemer, stresses that the impact of a such a sustained period of lower oil price will vary from country to country.
While IMF data shows Saudi Arabia, Russia and Nigeria need prices above $90 to balance their budgets, the first two have large currency reserves and others such as Kuwait or Kazakhstan would stay in the black even at $65.
Kraemer noted that some emerging markets – for example, Turkey- would benefit from falling oil prices.
BNP’s analysis suggests that $80 oil would see Russia, Azerbaijan and Kazakhstan lose investment grade status, Africa’s producers would fall deeper into junk territory, while the Middle East would see a wave of downgrades.
But it is not all bad news. Roughly 70 percent of EM nations are resource-hungry oil importers, meaning the 30 percent price fall this year is a major boon. – Reuters.
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